by John M. Curtis
(310) 204-8700

Copyright July 12, 2006
All Rights Reserved.

outing his tax cuts as a big success, President George W. Bush trumpeted “some good news for American taxpayer,” announcing that the 2006 federal deficit shrank from $423 billion to $296 billion, attributing the windfall to a $115 billion jump in tax revenues. While it's nice to take the credit, an improved stock market and employment picture shrank the deficit. With energy prices spiraling, interest rates rising and the stock market sputtering, Bush's rosy picture darkens by the day. “The tax cuts we passed worked,” Bush told a largely partisan White House audience, more a publicity stunt before of Midyear elections. When Bush passed his tax cuts in 2003 in the wake of Sept. 11, Alan Greenspan and the Federal Reserve Board aggressively slashed interest rates, taking the federal funds rate to 1%. Since June 2004, the Fed has raised rates 17 times to 5.25%, jumping the prime to 8.25%.

      Greenspan's successor Princeton economist Ben S. Bernanke said he's concerned about “core” inflation but does nothing, together with the White House, to lecture oil companies to show restraint. Oil futures stand today at over $74 a barrel, with jitters over Iran still giving Wall Street the perfect excuse to hike prices. Bush and Bernanke still don't get that runaway energy prices infect the entire economy and can't be artificially separated from “core” inflation. It's not fair that transportation companies, including major airlines, suffer while the oil industry reaps obscene profits. While Wall Street hangs on Bernanke's words signaling the future direction of interest rates, the economy can't succeed without stable oil prices. With Europe's central bank hiking interest rates, it's going to be difficult for Bernanke to not do the same. When Europe's rates go up, the U.S. dollar goes down.

      Bush knows that Bernanke's monetary policy, not his tax cuts, holds the key to future economic growth. Extravagant military spending on Iraq and Afghanistan has caused an ongoing bleed to the U.S. treasury, faced with unprecedented challenges meeting obligations to current Social Security and Medicare recipients and 70 million baby boomers set to begin retiring in 2008. Financing unending wars can't keep pace with expected tax revenue from future tax cuts. Bush faces some tough choices: Either find a way out of Iraq or face bigger budget deficits and higher interest races to pay for the debt. It's not rocket science to figure out that tax cuts can't reverse extravagant spending, whether for war or any other cause. Attributing today's increased tax revenues to tax cuts totally ignores how the Fed's generous monetary policy fueled today's economic growth.

      Inflationary pressures, linked to runaway oil prices and gouging by the oil industry, now threaten economic growth. Democrats have to stop election year posturing, touting former President Bill Clinton's past surpluses. Before Clinton left office, the party was over, watching the tech-bubble burst, shrinking tax revenues and sending the economy into recession. “Today's news is not cause for complacency, much less celebration,” said Rep. John M. Spratt Jr. (D-S.C.) pointing out the projected $305 billion surplus in 2001. Spratt doesn't mention the 2000-01 tech-wreck that sent government receipts tumbling, leading to today's record deficits. Democrats must paint a more realistic picture about today's economy, rather than playing election-year politics. Bush's real challenge involves getting out of Iraq and meeting the government's obligations to 70 million baby boomers.

      Bush's tax cuts provided a symbolic stimulus to ordinary consumers, reaping big rewards from an unprecedented real estate boom. Home equity lines, not tax cuts, fueled the current economic expansion now threatened by rising interest rates. When homeowners can't meet their obligations, consumer spending plummets, causing havoc in the economy. Before the economy tanks, Bush would be well advised to gain control over profligate spending. He can't fund Iraq's reconstruction indefinitely without having disastrous consequences on the U.S. economy. No amount of tax cuts can stop the $10-15 billion hemorrhage to subsidize the Iraq war, disaster relief, the new Medicare prescription drug benefit, among other things, expected and unexpected. Government spending is now expected to top $2.7 trillion in 2006. Without some fiscal restraint, ballooning deficits threaten the economy.

      Talking about Clinton's past surpluses offers nothing constructive about what to do with today's deficits. Bush has the right instinct about tax cuts but tax cuts alone won't control the government's current appetite for profligate spending, primarily on a fiasco in Iraq. Bush's chief strategist Karl Rove has done a masterful job selling Iraq as essential to U.S. national security. In reality, the Iraq war spreads the U.S. military too thin and drains the federal treasury from resources needed for important defense programs and the revenue to subsidize valuable social programs and financial and medical obligations to future retirees. No economy can sustain itself with unstable energy prices. Bush must do a better job of lecturing the oil industry to show restraint during a time of national peril. Instead of handing the mess to the next president, Bush should do more now to fix the problem.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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